Cycle length dependents and flexibility:
A) The spot price level provides implications for supply or demand volumes
B) Rapid increases to super normal margin levels will stimulate accelerated supply responses sooner than originally projected
C) Fluid view on duration required
Working examples:
#ironore massive evaluated price created a massive supply response in 6 months, spot down 50% plus
#coal massive accelerated price, potential shortages of substitution alternatives over the next 6 months, emerging market supply response in due course.
Now in the context of #uranium: cycle duration from today
Is a 2-3x PE cheap for #coal company given extraordinary high spot prices?
The answer is ofcourse no, perhaps 2 upside remains.
Variables to consider:
Low cost producer, still profitable as cycle lows, what's mid cycle CF multiple?
Are volumes expanding?
Is the share count reducing due to stock buy backs?
Using a price to book ratio, is it trading near an historic High?
How much super normal cashflow will be collected, prior to the cycle drop off?
Does the current PE drop to 8-10x using midcycle assumptions?
Whats the debt level?
A combination that could produce a 3-4x return from here:
- 50% sustainable increase in volumes over 2022 as low cost
- a net cash balance sheet allowing 20% of shares to be repurchased over 18 months
- 1st quartile cost producer, always profitable through the cycle